The impact of electricity prices on sectoral output in South Africa from 1994 to 2015

Abstract

PurposeThe purpose of this paper is to examine the impact of electricity prices on sectoral output in South Africa from 1994 to 2015 and also econometrically examine the impact of electricity prices on output at sectoral levels over the same period. The paper also put forth a policy proposal that brings together electricity end-users, suppliers and government regulators with the goal of conveying an effective outcome that withstands output growth without necessarily compromising social and developmental objectives.Design/methodology/approachLocal sources of data were utilised in applying panel data analysis. The paper utilised the data from South Africa Reserve Bank and Quantec South Africa. The Hausman test indicated that the fixed effect estimator is the appropriate estimator for this paper. Robust estimators (such as Driscoll Kraay (SCC), feasible generalised least of squares, least square dummy variables and seemingly unrelated regression (SUR) were employed for consistent and efficient inferences. The study also utilised the SUR regression to analyse the impact of electricity prices on output at a sectoral level.FindingsThe fixed effect estimator results of this paper indicate that electricity prices have a negative impact on sectoral output. Again, the SUR estimator shows that the sectoral output disparately responds to electricity prices change in South Africa over the period 1994–2015.Thus, six out of eight sectors significantly and negatively respond to electricity prices change in South Africa. The mining and the construction sectors seem not to be affected by electricity prices changes unlike agriculture, manufacturing, government services, transport and communication finance and trade.Research limitations/implicationsAlthough the research has attained its aims, there were some inevitable limitations. For instance, unlike the time series and cross-sectional data, the panel data were tardily assembled, since the researchers had to gather data for specific variables for each and every selected individual sector. However, this did not compromise the research findings since the panel data from both developed and developing countries are available from sources such as Easy data Quantec.Practical implicationsThe results of the study show that electricity price is a limiting factor to the sectoral production growth in South Africa. Therefore, any conservation policies regarding energy or electricity should be implemented with caution. Indeed, the government should implement policies that increase energy and electricity supply in the country. Thus, the government should set affordable prices of electricity that benefits both the power and economic sector output. In addition, the electricity regulators should set prices that do not damage output across economic sectors in South Africa. Again, the government should continue supporting the imposition of subsidies on the economic sectors that are more sensitive to electricity price. To this end, the study provides a policy proposal (in line with the South African National Development Plan and the climatic change strategies) that connects electricity producers, government electricity regulators, consumers and the society with the goal of conveying an effective outcome that withstands output growth without necessarily compromising social and developmental objectives.Social implicationsCost-reflective electricity prices may be a burden to end users but this will assist in the maintenance and expansion of the power industry to get rid of electricity supply and demand imbalances which may escalate electricity prices in future. Indeed, the electricity end users including the society should pay a price that improves generation capacity to avoid power shortages since the lack of energy (electricity) contributes to poverty and deprivation and can contribute to economic decline. In this regard, the government should work hard to reduce the public resistance towards the cost-reflective electricity prices strategy; there is a need to keep the electricity end users informed on the economic impacts of such strategies in order for them to make informed choices.Originality/valueThis paper utilised the panel data for sectoral analysis. Again, the study aimed to provide policymakers with more information on the behaviour of different sectors with regards to electricity price changes, and hence assisting regulators and policymakers in future decisions on electricity price changes in relation to output at sectoral levels. Better knowledge of the link between electricity prices and the real sector output should permit better regulatory decisions to facilitate economic efficiency. Furthermore, it helps the government to identify sectors in need of power subsidies to enhance economic development.